Reformulated gasoline closes with 4% loss

PolyaLesova

SAN FRANCISCO (MarketWatch) -- Reformulated-gasoline futures dropped 4% Tuesday to close at their lowest level in a week, as traders bet that refiners are making last-minute efforts to get as much gasoline into the market as they can ahead of Memorial Day weekend, which marks the traditional start to the summer-driving season.

Crude-oil prices finished lower as well, giving back part of their three-session winning tally of 6% as traders braced for stockpile data that some expect will show a fifth-weekly rise in U.S. crude supplies and a third week of rising gasoline inventories.

The expiration of the June crude contract also contributed to the price action, but energy traders appeared to largely ignore a report that warned of the likelihood of an "above-normal" 2007 Atlantic hurricane season.

Reformulated gasoline for June delivery closed down 9.5 cents at $2.3063 a gallon, its weakest closing level since May 15.

"Gasoline is extending losses after Colonial Pipeline said it is restricting the amount of gasoline" it ships to New York Harbor from the Gulf Coast, according to Phil Flynn, a senior analyst at Alaron Trading.

"A lot of gasoline is trying to squeeze through the pipeline" and that suggests refiners are trying to bring more gasoline to the market before Memorial Day, he said.

That also suggests that "we will see a little bit more gasoline in the coming days, which is good because it is desperately needed," said Flynn.

Against this backdrop, June crude gave back $1.30 to close at $64.97 a barrel.

On Monday, the contract closed up $1.33 a barrel, finishing at its highest level in more than three weeks as violence in Nigeria, Lebanon and Israel combined with concerns over the status of U.S. gasoline supplies for the summer-driving season.

July became the front-month contract for crude futures at the end of Tuesday's trading session. July crude closed down $1.36 at $65.51 a barrel.

Also in Nymex dealings, June heating oil closed down 4.37 cents to $1.9072 a gallon.

"With the Middle East again on the verge of conflagration, it seems incongruous that prices choose this particular moment to take a breather," said John Kilduff, another Man Financial energy analyst, in a note to clients.

"Another summer of violent clashes in Lebanon and [Pakistan President Pervez] Musharraf's regime in Pakistan on shaky ground could ignite new concerns over the use of oil as a weapon," he said.

"True, there is no oil in either Pakistan or Lebanon, but the forces that could be drawn into the conflict, particularly Iran, do have a considerable influence on oil prices," he warned.

Meanwhile, the oil market failed to react to news that BP
BP, -0.16%
has shut down 100,000 barrels, or one quarter, of its Alaska oil production at Prudhoe Bay because of a water pipeline leak.

The Associated Press reported that BP expects the shutdown to last a "few days."

"The oil market doesn't care because there is sufficient spare capacity to make up for any shortfall," said Flynn. So for now, "oil is getting hit on the double whammy of June crude expiration and pre-[supply] report profit taking."

Supply data on tap

The Energy Department and the American Petroleum Institute will release separate data on the nation's petroleum supplies for the week ended May 18 Wednesday morning.

The energy market reportedly is looking for the Energy Department to say that weekly gasoline inventories will have increased for the third time in a row, according to research firm Action Economics, which added: "It is expected that U.S. refineries have increased production to meet demand for the start of the U.S. summer driving season, which begins next week."

Analysts at Wachovia Corp. expect to see crude stockpiles fall by 500,000 barrels, as well as increases of 750,000 barrels in motor gasoline and 800,000 barrels in distillates, which include heating oil and diesel fuel.

Meanwhile, the average price for a gallon of regular gasoline climbed to another record of $3.209 on Tuesday, up from $3.196 on Monday and from $2.856 a month ago, according to AAA's Daily Fuel Gauge Report. See the data.

Hurricane watch

Rounding out the action in energy futures, natural-gas futures finished at their lowest level since May 10 even after the National Oceanic and Atmospheric Administration predicted that the 2007 north Atlantic storm season has a 75% change of being "above normal."

June natural gas fell 11.2 cents to close at $7.801 per million British thermal units.

The Atlantic hurricane season officially begins on June 1 and ends on Nov. 30.

NOAA predicts 13 to 17 named storms, with 7 to 10 becoming hurricanes. Of those hurricanes, 3 to 5 could become what NOAA considers "major" hurricanes -- those that are dubbed Category Three strength or higher.

A Category Three hurricane has winds of 111-130 miles per hour, with a storm surge that's generally 9-12 feel above normal.

On average, the north Atlantic hurricane season produces 11 named storms, with 6 becoming hurricanes -- including 2 major hurricanes, NOAA said.

Validation

NOAA's 2007 forecast seemed to "validate" the forecast from Colorado State University researchers released in April, according to Beth Sewell, a managing partner at Quantum Gas & Power Services Ltd. See archived story.

The "news has been out for a month or two about above-normal storms," said Sewell. Energy "prices are pretty high right now as compared to this time last year. I've read that platform operators have done quite a bit of infrastructure work on the rigs to hopefully reduce potential damage."

She doesn't expect to see a serious run up in prices "until the first storm threatens the Gulf."

In 2006, the region saw near-normal hurricane activity with nine storms during the official season, including five hurricanes. Of those hurricanes, two were major. That compared to 2005's record 28 storms, 15 of which were hurricanes, with seven of those considered major.

Overall, the hurricane forecast isn't providing any real support to prices. "We won't have a clear picture until this time next week, when Memorial Day is come and gone," said Anthony Sabino, a professor of law at St. John's University, whose practice includes oil and gas law.

"But expect that every change of the weather ... will bounce the market up and down like a yo-yo with too much caffeine," he said in e-mailed comments.

The Energy Department also will release an update on natural-gas supplies on Thursday. Man's Kilduff said the market expects another increase of 90 billion to 105 billion cubic feet in gas in storage for the latest week.

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